Public Protector, Postponed Delivery: Report on an Investigation into allegations of maladministration, corruption and related improper conduct relating to the leasing of the Eco Point Office Park and utilization of labour brokers by the South African Post Office, 23 February 2016
Executive Summary
(i) "Postponed Delivery" is my report as the Public Protector issued in terms of section 182(1)(b) of the Constitution of the Republic of South Africa, 1996 (the Constitution), and Section 8(1) of the Public Protector Act 23 of 1994 (the Public Protector Act).
(ii) The report communicates my findings and the appropriate remedial action I am taking in pursuit of section 182(1)(c) of the Constitution following an investigation into complaints lodged by the Communication Workers Union (CWU) (the Complainant), a labour union recognized by the South African Post Office (SAPO), on 16 March 2011. The Complainant alleged maladministration by the South African Post Office in the leasing of the Eco Point Office Park in Centurion, Gauteng Province to accommodate its Head Office, the procurement of the services of a catering company, the procurement and utilization of labour brokers and possible corrupt relationships between some of its employees and certain external service providers.
(iii) The period covered by the investigation is restricted to transactions and conduct that took place between 01 April 2002 and September 2012. The transactions and activities covered are confined to the leasing of the Eco Point building, Procurement of a catering company and outsourcing of Labour Brokers. The investigation period is from October 2011 to January 2016.
(iv) The report tells a story of how at the height of economic challenges tbat had adverseiy affected service delivery, the then management and the Board of Directors of SAPO (The Board) decided and went ahead to procure their current national office premises at the Eco Point Office Park in Centurion while outsourcing some of the core functions to labour brokers.
(v) As the national postal service of the Republic of South Africa SAPO is a strategic organ of state with an expenditure budget of approximately R6.5 billion, a projected revenue of approximately R7 billion and a staff compliment of over 22 000 people operating more than 2,500 postal outlets and points of presence throughout the Republic of South Africa. In addition to the provision of national postal services, SAPO has three subsidiaries, namely Post Office Logistics, Expedited Mail Services and the Post Bank.
(vi) In the last few years SAPO has been the subject of various media reports dealing with cash-flow and liquidity challenges, including inability to pay salaries at some stage. At the time of finalising the report SAPO had requested a cash injection from the National Treasury to be able to discharge some of its obligations.
(vii) It is worth noting that the matters covered in the investigation occurred long before the current Board of Directors were appointed. SAPO is currently controlled by a Board of Directors (the Board) chaired by Dr S Lushaba, which was appointed in August 2015. The current Group Chief Executive Officer (GCEO), Mr M Barnes was appointed, shortly before the investigation was finalised in January 2016.
(viii) In its complaint, the CWU alleged that:
(a) During its relocation from the National Postal Centre building (NPC) from the Pretoria Central Business District (CBD) to the Eco Point Office Park, the South African Post Office (SAPO) appointed "Lilly white" companies to render project management services despite lack of Black Economic Empowerment (BEE) accreditation, as envisaged by the SAPO BEE Policy and Strategy;
{b) SAPO's relocation from the NPC constituted fruitless expenditure since SAPO ended up paying approximately R3.6million per month towards rental before its actual occupation of the building;
(c) A project manager was appointed to procure a catering company called FedEX (sic) (supposed to have been Fedics), which constituted illegal outsourcing of SAPO's Supply Chain Management responsibilities and SAPO further failed to consult with them.
(d) SAPO imposed restrictive financial measures that were implemented across its business units resulting in delivery standards being compromised, since a second day delivery was implemented thus delaying mail items destined for speedy delivery at exorbitant costs.
(e) It is suspected that there is a deep rooted corrupt relationship between SAPO employees and employment agencies/labour brokers which has informed irregular appointment of the aforesaid agencies/brokers, who operated without clear contractual relationships with SAPO.
(ix) By the time the investigation was finalized and this report issued, some of the implicated employees and SAPO Board Members had resigned and/or their employment with SAPO had been terminated and a new Board of Directors and Group Chief Executive Officer (GCEO) had been appointed.
(x) It is worth noting that when the investigation commenced and the first investigation letter written to the SAPO GCEO in 2011, SAPO had not yet moved from the Pretoria CBD to the Eco Point Office Park in Centurion. Accordingly, SAPO still had an opportunity to reverse some or all its decisions on being alerted to irregularities. It is also worth noting that by its own admission, SAPO continued months later to make further payments in respect of the empty Eco Point Office Park despite the contract being silent on the date on which rent would become due and there being no benefit accruing to SAPO from the payment of rental towards an unoccupied building.
(xi) The duty to take action to curtail or arrest any irregularity on being warned about its possibility is, according to the Constitutional Court in Khuma/o and Another versus MEC for Education: KwaZulu-Nata/ (CCT 10/13) {2013] ZACC 49, imposed on all public functionaries by section 195(1) of the Constitution, requiring, among others, the promotion of efficient, economic and effective use of public resources.
(xii) On analysis of the complaint the following five (5) issues were identified for consideration and to focus the investigation:
(a) Did SAPO improperly procure the Eco Point Office Parl< to accommodate its Head Office?
(b) Did SAPO incur fruitless and wasteful expenditure through upfront payment of rental in respect of the Eco Point Office Park amounting to more than R3.6m per month while the building stood empty prior to occupation?
(c) Did SAPO improperly appoint a project manager to procure the setvices of a catering company by the name of Fedics and did the said procurement amount to illegal outsourcing of SAPO's Supply Chain Management responsibilities?
(d) Did SAPO improperly implement severe setvice indifferent cost cutting measures that disregarded operational requirements and compromised service excellence across its business units?
(e) Did SAPO improperly appoint Labour Brokers with whom some of its employees had a corrupt relationship?
(xiii) The investigation process included interviews, exchange of correspondence and meetings with former and current members of the Board and senior officials, including the erstwhile and current Chairpersons of the Board, the former and current GCEO's and the former Chief Financial Officers.
(xiv) The investigation also covered the consideration of laws and other prescripts regulating the impugned conduct. Key provisions relied on in this regard was section 217 of the Constitution regulating public procurement and other provisions regulating procurement, among them, the South African Post Office SOC LTD Act 22 of 2011, the Public Finance Management Act 1 of 1999 (PFMA), Treasury Regulations and the SAPO Procurement Policy adopted in 2009. In view of allegations of corruption involving possible financial interests of certain SAPO officials in the labour brokerages said to have been appointed irregularly, the provisions of the Prevention and Combatting of Corrupt activities Act 12 of 2004 (PCCM), were also taken into account. The transversal principles of public administration articulated in section 195 of the Constitution also offered guidance. For consistency, I have also taken into account, touchstones or principles from previous Public Protector reports, key in this case having been "Against the Ru/es" (2010) dealing with similar alleged leasing irregularities and questionable relationships.
(xv) All information and evidence gathered during interactions with SAPO management and the Complainant were taken into account in an effort to reconstruct what happened and if what happened was in line with the law and other prescripts. After finalising the investigation in January 2016, notices issued in terms of 7(9) of the Public Protector Act, alerting relevant parties of evidence implicating them and the possibility of adverse findings, and discretionary notices, were issued to relevant parties.
(xvi) Responses received were analysed and appropriately integrated. I must indicate that it is heartening to record that the SAPO Board did not contest any of the intended findings and remedial action. Commendably, the Board candidly conceded that there had been systemic irregularities in financial and Supply Chain Management (SCM) at SAPO and further advised that a process was underway to restore good governance. The Board advised that the corrective measures included the implementation of the report of the Special Investigation Unit (SIU), which had just released its report.
(xvii) In arriving at the findings, I have been guided by the standard approach adopted by the Public Protector South Africa as an institution, which simply involves asking: What happened? What should have happened? Is there a discrepancy between what happened and what should have happened? If there is a discrepancy, does the conduct amount to maladministration or improper conduct? If there was indeed improper conduct or maladministration, what would be the appropriate remedial action?
(xviii) As customary, I approached the "what happened" enquiry as a factual question settled on the assessment of evidence and making a determination on a balance of probabilities. To arrive at a finding on what happened, the investigation, like all others, relied on oral and documentary submissions by the Complaint, SAPO management and independently obtained information and/or evidence.
(xix) The issue of what should have happened was settled through ascertaining the standard that should have been complied with by SAPO in executing the transactions that are alleged to have been handled improperly. In determining the standard that SAPO should have complied with to avoid improper conduct or maladministration , I was guided as is customary, by the Constitution, relevant national legislation and related regulatory instruments as indicated in paragraph (xii) above.
(xx) After examining and evaluating the evidence obtained and measuring the conduct disclosed by the evidence against the standard that should have been upheld by SAPO had it complied with the regulatory framework, Ihave arrived at the following findings:
(a) Regarding whether SAPO improperly procured the Eco Point Office Park to accommodate its the Head Office:
1. The allegation that the procurement of the Eco Point Office Park to accommodate the Head Offices of SAPO was irregular is substantiated.
2. SAPO's acquisition of a ten year lease costing approximately R161m, in 2010, to house its National Office at the Eco Point Office Park was tainted by procurement irregularities and corruption.
3. At the outset of the process, SAPO failed to ensure proper demand management before the acquisition of the Eco Point Office Park as the Business Case on which the Board relied included misrepresentation of facts and falsified information regarding structural defects in the National Postal Centre (NPC) where SAPO was accommodated at the time and about the green status of the Eco Point Office Park, among others.
4. SAPO further conceded that in violation of the PFMA, the relocation to the Eco Point Office Park had not been captured in its Strategic Plan for the financial year 2009/2010.
5. The SAPO Board further failed to ensure that the acquisition of the Eco Point Park building was preceded by a competitive bidding process, which conduct was in violation of the PFMA and its corporate Procurement Policy of 2009. The procurement of the lease for the Eco Point Park building was therefore not fair, equitable, transparent, competitive and cost effective as required by section 217 of the Constitution read with paragraph 3.1.1 of the SAPO Procurement Policy.
6. The failure by SAPO to follow a proper bidding process could not be justified under permissible deviations in terms of articles 13.14 and 13.15 of the SAPO Policy and section 51(1) of the PFMA as there was no urgency and the Eco Point building was not the only building available to justify a single source deviation. The acquisition of the Eco Point Office Park was, accordingly unlawful.
7. The Board commendably took action against its officials, Messrs Jekison and Wentzel when it was alerted to the fact that the Business Case they had prepared to justify the relocation and which prompted the Board to adopt a resolution on 26 November 2009, to move to the Eco Point Park, was riddled with misrepresentations of fact and falsified information. The Board's action was also taken in pursuit of a finding by a KPMG report it had commissioned that there had been a corrupt relationship between Centurion Vision Development (PTY) Ltd, the owners of the Eco Point Office Park and one of the SAPO officials who was at the centre of the transaction.
8. However, on receiving the KPMG report, SAPO failed to act expeditiously to review the deal with Centurion Vision Development (PTY) Ltd in the light of the finding of corruption having the possibility of negating the legality of the transaction. This conduct was in violation of section 195 of the Constitution
9. The acts and omissions of the erstwhile SAPO Board regarding the acquisition of the Eco Point Park building accordingly constitute maladministration as envisaged in section 6(5)(a) of the Public Protector Act and improper conduct as envisaged in section 182(1)(c) of the Constitution.
(b) Regarding whether SAPO incurred fruitless and wasteful expenditure through upfront payment of rental in respect of the Eco Point Office Parle amounting to more than R3.6million per mon'th while the building stood empty prior to occupation
1. The allegation that SAPO incurred fruitless and wasteful expenditure in the form of irregular upfront rental towards the Eco Point Park building before occupation is substantiated.
2. However, the amount involved was not R3.6m per month as alleged but R2 372 050.00. Furthermore, the irregular payments that were the subject of the original complaint were later conceded as irregular and refunded.
3. Subsequently, SAPO made payments towards the rental for the Eco Point Office Park for a ten month period effective from May 2010 to March 2011 amounting to approximately R22m prior to occupying the building and contrary to the provisions of paragraph 2 of the lease agreement signed in February 2010 which provided that "Should the occupation be after 1 May 2010 then the Commencement Date shall be such later date..."
4. The conduct of the erstwhile SAPO GCEO in approving the said payments for an unoccupied building, was in violation of the provisions of section 83 of the PFMA which prohibits irregular expenditure anc:llor fruitless and wastefulexpenditure.
5. The Acts and omissions of SAPO regarding the fruitless and wasteful expenditure arising from the 10 month rental towards an unoccupied building constitutes maladministration and improper or unlawful enrichment of the owners of the building, Centurion Vision Development (Pty) Ltd to the tune of R22m.This constitutes improper conduct as envisaged in section 182 of the Constitution.
(c) Regarding whether SAPO improperly appointed a project manager to procure the services of a catering company by the name of Fedics and whether the said procurement constitutes illegal outsourcing of SAPO's Supply Chain Management responsibilities:
1. The allegation that SAPO improperly appointed a company to project manage the procurement of a catering company, Fedics to operate the canteen at the Eco Point building is not substantiated. However, the allegation that this amounted to outsourcing of Supply Chain Management operations of SAPO is substantiated.
2. Indeed, SAPO through consultants called lnfraburo who were responsible for the project management of the move to Eco Point building appointed lntenda to procure the catering services of Fedics through an On-Line Limited Bidding process (LBD). This was approved by EXCO following a decision taken as part of the overall business restructuring of the SAPO to outsource all the non-core activities. It was therefore not an isolated case of outsourcing of services as approximately fifty-six (56) other contracts were procured using this method. The SAPO SCM Department was not involved in the procurement of lntenda.
3. Due to insufficiency of documents regarding the process followed to appoint the project managers to manage specified procurement processes, Iam unable to adjudicate the compliance of such processes with SCM prescripts, including fairness, transparency, competitiveness and competence.
4. Furthermore, whereas the procurement of the services is questionable in view of doubled costs and heightened risk of non-compliance, the practice cannot be conclusively said to have violated Paragraph 3.1.1 of the SAPO Procurement Policy which makes provision for the appointment of service providers, including consultants, in accordance with a system that is fair, equitable, transparent, competitive and cost effective in line with the provisions of section 217 of the Constitution.
5. However, I am encouraged by the Board's commitment to abandon the outsourcing of SCM functions or use of middle-men.
6. Despite my immense discomfort regarding the outsourcing of procurement services, I am unable to find that the outsourcing of procurement to external project managers constitutes maladministration as envisaged in section 6(5)(a) of the Public Protector Act and improper conduct as envisaged in section 182 of the Constitution.
(dJ Regarding the a/legation that SAPO improperly implemented severe service indifferent cost cutting measures that disregarded operational requirements and compromised service excellence across its business units:
1. The evidence regarding the allegation that the SAPO implemented extreme cost curtailing measures which unduly compromised service delivery standards is inconclusive.
2. By its own admission, SAPO did implement severe cost cutting measures and service excellence was compromised. However, although subsequent problems did include late delivery of items that in terms of internal and public promised standards should have been delivered earlier, it is difficult to specifically attribute the deficiencies to the cost-cutting measures.
3. However, it is a source of concern that SAPO moved to more lavish offices at much higher rental at a time when it was experiencing service related financial constraints. The concern is exacerbated by the discovery that the Business Case for relocating from NPC to Eco Point building was doctored and the relationship between a key SAPO official behind the move and Centurion Vision Development (Pty) Ltd, the owners of the Eco Point Building, poisoned.
4. Of equal concern is that there seems to have been inadequate meaningful consultation of employees on the cost-cutting measures and use of labour brokers, among other important factors. Iam encouraged, however, by the new GCEO's commitment to work in partnership with employees as change is managed towards a better functioning national postal services agency.
5. J am accordingly unable to make a finding of maladministration or improper conduct.
(e) Regarding whether SAPO improperly appointed Employment Agencies/Labour Brokers with whom some of its employees had a corrupt relationship:
1. The allegation that SAPO improperly appointed labour brokers who operated without written contracts is substantiated. However, the suspicion of corrupt relationships between certain SAPO officials and the labour brokers has not been substantiated
2. SAPO irregularly appointed and utilized labour brokers from April 2002 to September 2012 with some of them having expired contracts and others with no written contracts in addition to them having been appointed without following proper procurement processes as envisaged in its Procurement Policy and related laws .
3. The total amount involved in the procurement of labour brokers is estimated at about R2 735 942 243.22.
4. As these relationships were not properly regulated and the billing difficult if not impossible to control to prevent irregular scope creep, overbilling, overcharging and false billing, it cannot be said that the run-away expenditure involved did not contribute to SAPOs current liquidity and cash-flow problems.
5. SAPO's failure to follow proper procurement procedures was in violation of paragraph 3.1.1 of its Procurement Policy and section 51(1) of the PFMA read with section 217 of the Constitution.
6. SAPO further failed to implement the recommendations of the KPMG report advising that disciplinary measures be taken against Messrs Serare and Nogxina who could not ensure that contracts were put into place between SAPO and labour brokers, in violation of section 51 (1)((e) of the PFMA.
7 SAPO's appointment of the labour brokers without following proper procedures constitutes maladministration as envisaged in section 6(5)(a) of the Public Protector Act and improper conduct as envisaged in section 182 of the Constitution. The failure to implement the KPMG report fully also constitutes maladministration and dereliction of duties.
(xxi) The appropriate remedial action I am taking in terms of section 182(1)(c) of the Constitution is to require:
(a) The SAPO Board of Directors is to take effective and appropriate steps to:
1. Recover the amount of R22m that SAPO paid to Centurion Vision Development, in respect of upfront rental payment for the period May 2010 to March 2011, when it had not taken occupation of the Eco Point building;
2. End use of an external service providers to procure another service provider as a project Manager, where the corporate SCM is competent to deliver;
3. To ensure that the recommendations contained in the KPMG and SIU reports are fully implemented without any delay; and
4. Ensure that evidence pointing to the contravention of the Prevention and Combatting of Corrupt activities Act is submitted to the South African Police Services immediately.
(b) The Group Chief Executive Officer is to take effective and appropriate steps to:
1. Review corporate SCM processes and procedures and ensure that systems are put in place to facilitate proper controls and compliance with SCM prescripts by officials handling procurement matters at all times;
2. Review the SAPO document management system and update it to ensure that documents relating to SCM processes, including contracts are filed appropriately and are available when required; and
3. Ensure that in future employees are properly consulted on planned adjustments to operations impacting on them and service delivery.
Issued by the Office of the Public Protector, 23 February 2016 (see full report here – PDF)
